Saxo Bank Q4 Outlook 2011

12 octobre 2011

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Copenhagen - The next few months will see desperate moves by policymakers to save the financial system, according to Saxo Bank. In their Q4 financial outlook, the online trading and investment specialist says that this eventually will lead to Crisis 2.0.

In the past few months, the global economy has moved from bad to worse. Growth prospects have soured and governments and central banks are pulling out the stops to save the system once again. In Europe, renewed efforts to save the European Union from its debt crisis are foundering as EU governments have reached an all-time low in solidarity and an all-time high in playing to more domestic national agendas. However, for the first time in months, Saxo Bank is optimistic and says that Crisis 2.0 could result in a real confrontation between the Western world’s debt demons and bad practices and lead to unfettered markets and allocation of capital based on gaining the highest marginal return.

“Policymakers’ efforts in the developed world to salvage the economy with bailouts, stimulus and money printing have failed to build a sustainable recovery since the financial crisis in 2008. It seems policymakers and central banks have hardly learnt anything from their past mistakes. In fact, it appears they are ready to double down on their previous efforts, a state of affairs we call ‘Maximum Intervention’, which we believe will lead us towards Crisis 2.0.

“On a positive note, we believe Crisis 2.0 could result in a real confrontation with our debt demons and bad practices, eventually replacing the extend and pretend routine we’ve seen since the global financial crisis got under way. Now, more than ever, would be the time in which we ponder the true meaning of the word crisis: a turning point, not an extended period of doom and gloom. However, for now investors should fasten their seatbelts because we are in for a rough ride – one that will very hopefully see us in a better place when we finally land”.

The Quarterly Outlook Q4 2011 focuses on the following areas:

Macro OutlookThough the world economy will see robust growth of 3.8 percent this year this figure papers over a chasm between developed and emerging countries. While the developed economies led by the heavyweights (U.S. and Eurozone) are struggling to cope with the drag from deleveraging, emerging markets have hiked rates as inflationary pressures have mounted due to strong domestic demand. Domestic demand in emerging countries remains strong and should offset weakening foreign demand from developed economies.

Monetary policySaxo Bank expects the Fed’s “Operation Twist” to be the next step towards “QE Infinite”, with the next instalment being QE3, probably in Q1 2012. The Bank also expects that before year-end the ECB will reintroduce the provision of unlimited, fixed rate, long-term liquidity to banks, flushing the system with liquidity and forcing actual market rates lower than the current refinance rate at 1.5 percent – which may further go down. The analysts maintain their call for unchanged Japanese rates throughout 2011 and 2012, and feel further quantitative easing is very likely. Similarly, the Bank feels that QE2 in the UK is likely before Christmas and rates are not going to rise before 2013.

FX OutlookSaxo Bank suspects a further tightening in yield spreads between the USD and other currencies will continue to unwind the carry advantage built up against the USD last year and at the beginning of 2011. The Euro could see a short-term relief rally if the EU manages to muddle through with the solidarity enforced by the market’s discipline. NOK appears to be the safer harbour than SEK, but it is unlikely to replicate the CHF’s previous performance. Also, the Aussie’s and Kiwi’s remain to appear extremely overvalued, and trading is expected to become more sidewise.

FX OptionsDespite current high levels of volatility, Saxo Bank is cautious towards any short EUR downside option positions, and would rather lean towards a long option position aimed at benefitting from a lower EURUSD spot. If selling downside options, the Bank would much rather enter a conservative strategy such as selling EURCHF put spreads, rather than selling plain vanilla options. This would allow the investor to control the potential risk through 1.20.

AsiaThe report suggests that China is facing an erosion of its global competitiveness with wage pressures linked to high-flying inflation being the dominant factors. The Chinese currency, and its gradual revaluation, is also playing its part and China’s loss of competitiveness may be seen as a helpful factor in the global rebalancing process. But Chinese authorities do not see any need to panic. If they can succeed in pulling off the latest Five-Year-Plan then this development, and its impact on the trade balance, will not be a major issue.

Equity OutlookThe Bank’s analysts do not recommend investors go all-in on equities despite compelling underlying fundamentals. It is more meaningful to keep some powder dry if stocks continue lower due to unpredictable events, and to increase exposure there if stocks tumble. This sounds nerve-racking for most investors but it is the most profitable strategy to keep increasing exposure in risky assets. If there are surprises in economic data going forward the biggest winners will be stocks in the financial, materials and industrial sectors. Investors that are willing to take on risk should consider those sectors as that is where the largest potential risk-reward ratio exists.

Commodity OutlookCommodity markets will continue to be driven by worries about the potential impact of a slowing global economy. Cyclical commodities like energy and base metals have suffered as a consequence while safe haven flows and adverse weather have been the main reasons for gains across precious metals and agricultural commodities. Saxo Bank believes that renewed dollar strength during September will continue into the last quarter and this could potentially have a dampening effect on the performance of commodities, ensuring a relative flat 2011 performance of the major commodity indices.